Our Finite World

Exploring how oil limits affect the economy

Today’s Energy Crisis Is Very Different from the Energy Crisis of 2005

Back in 2005, the world economy was “humming along.” World growth in energy consumption per capita was rising at 2.3% per year in the 2001 to 2005 period. China had been added to the World Trade Organization in December 2001, ramping up its demand for all kinds of fossil fuels. There was also a bubble in the US housing market, brought on by low interest rates and loose underwriting standards.

ENERGY KEY TO SUSTAINING CIVILIZATION

Figure 1. World primary energy consumption per capita based on BP’s *2022 Statistical Review of World Energy*.

The problem in 2005, as now, was inflation in energy costs that was feeding through to inflation in general. Inflation in food prices was especially a problem. The Federal Reserve chose to fix the problem by raising the Federal Funds interest rate from 1.00% to 5.25% between June 30, 2004 and June 30, 2006.

Now, the world is facing a very different problem. High energy prices are again feeding over to food prices and to inflation in general. But the underlying trend in energy consumption is very different. The growth rate in world energy consumption per capita was 2.3% per year in the 2001 to 2005 period, but energy consumption per capita for the period 2017 to 2021 seems to be slightly shrinking at minus 0.4% per year. The world seems to already be on the edge of recession.

The Federal Reserve seems to be using a similar interest rate approach now, in very different circumstances. In this post, I will try to explain why I don’t think that this approach will produce the desired outcome.

EXPONENTIAL POULATION GROWTH WILL EXHAUST ENERGY RESOURCES

IS HUMANITY SUSTAINABLE?

KEY TAKEAWAYS

[1] The 2004 to 2006 interest rate hikes didn’t lead to lower oil prices until after July 2008.

[2] The purpose of the US Federal reserve raising target interest rates was to flatten the growth rate of the world economy. Looking back at Figure 1, the growth in energy consumption per capita was much lower after the Great Recession. I doubt that now in 2022, we want even lower growth (really, more shrinkage) in energy consumption per capita for future years.*

[3] While the growth rate in energy consumption per capita was much lower after 2008, the price of crude oil quickly bounced back to over $120 per barrel in inflation-adjusted prices in the 2011-2013 time frame.

[4] High prices in the 2006 to 2013 period allowed the rise of unconventional oil production. These high oil prices also helped keep conventional oil production from falling after 2005.

[5] A better way of looking at world crude oil production is on a per capita basis because the world’s crude oil needs depend on world population.

[6] Unconventional oil, if analyzed by itself, seems to be quite price sensitive. If politicians everywhere want to hold oil prices down, the world cannot count on extracting very much of the huge amount of unconventional oil resources that seem to be available.

[7] Figure 1 at the beginning of this post indicated falling energy consumption per capita. This problem extends to more than oil. On a per capita basis, both coal and nuclear energy consumption are falling.

[8] The world seems to be at a difficult time now because we don’t have any good options for fixing our falling energy consumption per capita problem, without greatly reducing world population. The two choices that seem to be available both seem to be far higher-priced than is feasible.

[9] Conclusion. Figure 1 seems to imply that the world economy is headed for troubled times ahead.

TOP BILLIONAIRE INVESTOR NOT POSITIVE ABOUT FUTURE